Should You Background Your Weaned Calves?

Deciding whether to hold calves and add weight between weaning and the feedlot should be a tough decision. "It all boils down to looking in the mirror," believes Dale Blasi, a Kansas State University stocker cattle specialist.

He's talking about cow-calf producers deciding to keep their calves and add weight to them prior to marketing, especially those who have never done it, or have done so infrequently. After all, the stocker and backgrounding business or enterprise requires different skills and a different mindset.

"The stocker business is a margin business, and that's a different situation from looking at return on investment in a fixed-cost business like the cow-calf enterprise," explains Jason Sawyer, Texas A&M University stocker specialist. "As a cow-calf producer in a fixed-cost business, the focus is on least cost; how little can I spend to bring in a calf? With the stocker enterprise, as a margin business, the focus needs to be on the value of gain."

Sawyer emphasizes that even though a producer owns the calves, keeping them past weaning should be managed as a separate enterprise, with the calves valued appropriately as a cost to that enterprise.

"The key is to place an appropriate value on the weaned calves, assess what they're really worth," Sawyer says. "When producers want to hold their own calves, they sometimes forget to value them going into the enterprise."

Or, when they do value them, Sawyer says some producers think their calves are worth more than the market says they are. Others undervalue them relative to the market.

"Consult with order buyers, or price the cattle so you know what you could actually sell the calves for today. Without that information, there is no way to make a breakeven estimate, or to decide whether to keep or sell them," Sawyer says.

The same goes for pasture.

"You get the argument, especially in a year when there's abundant forage, that any grass you own would go to waste if you didn't use it, so the grass is basically free," Sawyer says. "But I think it's always appropriate to budget in an opportunity cost."

In this case, other than using it yourself, you could lease the acres to someone else; or take in someone else's stockers on a gain basis. That's the value you're trading away if you decide to use it yourself.

"Opportunity cost is really your risk premium in the venture, above the value of the cattle," Sawyer says.

It boils down to considering what else you could do with the money you'd be "investing" via the increased risk and delayed cash flow associated with keeping your calves to heavier weights.

That means having some idea of what you believe the cattle will be worth when you plan to market them. "If this is an occasional enterprise, those projections might not be accurate, and that creates risk in the marketing process," Sawyer explains. "Have an idea of what you think cattle will weigh, because there are weight classes you want to avoid. Six-weight heifers are the classic example -- nobody really wants to own them.

"Make comparisons on a net basis. Look at what's selling today. Look at the futures market and figure out the basis. That will tell you something about freight costs. When forecasting prices, you need to deduct the basis price from the futures price to see what you can expect to receive in the cash market," Sawyer says.

He notes basis for feeder cattle has widened beyond historical averages during the last 12 months, partly because of increased feed and freight costs.

"I also encourage producers to evaluate the return on equity rather than the return on investment. Agriculture is a leveraged business," he adds.

Ironically, that means cow-calf producers who see an opportunity to market more of their forage, feed and labor in growing calves can find it more profitable to sell their own calves, then buy others with more economic leverage.

Buying more return. Think of it. A five-weight calf is worth $117/cwt., let's say, or $585. That's the equity you're investing to retain that calf. With reasonable credit, you can borrow money for $120/head or so equity.

"If I buy those calves outright (or own them), I have to net $30/head to make 5% return on equity. If I borrow $120, that same $30/head return is making me in the neighborhood of a 25% return on equity," Sawyer explains. "So, for a cow-calf operation fortunate enough to be debt-free, the opportunity has to make more return to make it worth doing. That operation is well positioned to sell its calves and buy someone else's with borrowed money."

This is especially true if your calves typically top the market. The equity you'd be investing in the stocker phase is even higher, meaning that enterprise would have to return you more than average to account for the risk.

"If I own the calves and can sell them for a $10 premium to the market today, why would I keep them?" Sawyer wonders.

Of course, if you know how your calves perform beyond weaning, you'd be selling a sure thing and be buying more risk.

"But risk is how you make money in a margin business," Sawyer says. "Can I sell mine and buy someone else's at a discount price? It's all about scenario-building and budgeting."

Most land-grant universities and Extension offices make an effective starting point for constructing budgets based on local values (see section "What if?").

However you come by the knowledge, Blasi says, "You have to understand the mechanics behind risk management so that you're not just trading dollars or worse. You have to make sure you're accomplishing more than making some work for the hired hand. There should be a return to the asset to compensate for the risk."

Key considerations. Even when the potential economic rewards relative to the risk make a stocker enterprise appear viable, new or infrequent players to the stocker business must address some basic logistical questions.

For instance, there's a reason so many of this nation's calves are weaned on the interstate each year -- lack of facilities. Depending on how a cow-calf producer intends to manage calves, Blasi encourages them to make sure their facilities are adequate and they have any necessary environmental permits in place they may not have needed previously.

Moreover, you can be the poster child for everything that a cow-calf producer should be. But the skills and stomach required in the stocker business aren't necessarily the same.

As an example, Blasi says it's hard for someone who's never been through a health wreck with weaned calves to understand how taxing it can be physically, mentally and emotionally. In the cow-calf business, there's not much you won't do to save a calf. It's the same in the stocker business, up to about three treatments then money and the necessity to concentrate on the rest of the calves may mean there's not much else you can do.

"Certainly, with non-commingled cattle and no transportation stress to speak of, you would expect the calves to be low-risk, but that doesn't mean no risk," Sawyer says. "I'd encourage those who infrequently hold calves past shipping to work with their veterinarian in setting up pull-and-treat parameters, so they go into it knowing when they'll pull calves and what they'll treat them with, and how they'll evaluate the response.

"Those who haven't preconditioned or weaned before need to pay more attention to health management and should probably budget that factor in up front. Make sure your herd vaccination and calf vaccination protocols are up to snuff; don't try to save $2/head by skimping on vaccine."

Sawyer adds that the dynamic nature of the stocker business requires more flexibility. With cows and calves, the primary marketing decision usually revolves around whether you're going to wean or precondition. Once those calves are part of a stocker enterprise, every day could be their sale day. In other words, you start with a game plan: Add so many pounds for a projected cost of gain to market in a seasonably favorable timeframe. But if the required profit can be had before then, you pull the trigger.

Selling feeder cattle rather than calves also requires more commitment to making rather than taking a price, Sawyer says.

"If part of the reason you're keeping calves is to add value to them, you should have the same commitment to retrieving that added value from them," Sawyer says. "Three different people price the cattle three different ways. My temptation might be to take the highest price, but other variables such as shrink and basis within the transaction might mean a lower price offers me more return."

Keeping calves does increase marketing options. Blasi points to the opportunity to participate in specific preconditioning programs tied to marketing. He adds, "Cow-calf producers also have the unique opportunity to age- and source-verify."

Plus, Sawyer points out producers who can't make a load with calves, may find it possible with feeders. "Load-lot size opens up a huge number of opportunities for producers, whether they do it with their own cattle or by pooling them with others," he says.

Even when all of this adds up, Blasi explains tax implications can keep some producers from charging on. Especially if this will likely be a one-shot enterprise, odds are you'll be selling two calf crops next year and none this year.

"With some planning and working with your accountant, you can usually create enough of a loss to carry forward to next year," says Sawyer. But it requires planning ahead.

"You can turn your money so much quicker in the stocker business, in a margin business," Blasi says. "But, there's a lot that goes into it."

What if? Here are some sites that contain stocker budgeting and breakeven help. Be sure to check with your local land-grant university and Extension Service, too.